Mike Butler: Tax proposals from a landlord's perspective

The National Party was voted in on a policy of cutting personal tax. Last Tuesday Prime Minister John Key told parliament of an intended raft of tax increases, including hiking GST to 15 percent, to achieve an unspecified decrease in the top personal tax rate. He had ignored his pre-election promise of no increase to GST, so was obliged to weather accusations in the House of an astounding flip-flop. Even so, by Saturday he blithely claimed, in an interview on Radio NZ, that everyone would be better off.

His statement to the House ruled out a land tax and a capital gains tax, but by Saturday, he was clear that depreciation claims on buildings would go.

In the absence of any detail, and with the complications of the Working for Families scheme, and with assurances that low-income families will be compensated, it is difficult to work out the impact.

That, combined with widespread financial illiteracy, means it has been possible to produce polls that show some support for the scheme.

Here are the figures for a taxpayer whose business is to own and manage residential rental properties. The assumed new top personal rate is 30 percent, which is a possible figure if the top personal rate was aligned with company and trust tax rates, the recommendation of the Tax Working Group.

That landlord last year produced a net surplus before depreciation of $120,000, claimed depreciation of $23,600, showed a net profit of $96,400, and paid tax of $26,182.

If depreciation was disallowed, and if the top tax rate was 30 percent, the landlord would pay $30,490 in tax, worse off by $4308.

A GST increase to 15 percent would add about $1000 to this landlord’s total expenses, would reduce net surplus to $119,000, and would reduce tax to $30,190, which is still an overall increase of about $4000.

With the Government’s core expenses for this year totaling $65.2-billion, and revenue sliding to $56.7-billion, the Key government is forced to act, bearing in mind his promise to cut taxes, and assuming the government intends to get out of deficit.

He has at least two possible ways to lower the top personal tax rate and align it with the company and trust rates. He could raise GST and axe depreciation, as he has proposed, or reduce government spending.

The 2025 taskforce recommends that if Government operating spending as a share of GDP should be reduced by 2012/13 to 29 percent, the same share as in 2004 and 2005, this would allow the maximum personal tax rate, and the company and trust tax rates, all to be reduced to 20 percent, not the 30 percent that Key may be advocating.

So what makes up this spending blowout since 2004-05?

Key was part of the opposition that decried Working for Families, introduced in the 2004 budget, which costs an estimated $1.1-billion a year.

When the Clark-Cullen government cut interest on student loans in 2005, Finance Minister Bill English called the move irresponsible. However, he has left the policy unchanged. A total of $1.4-billion was budgeted for student loans this year.

There are a number of government departments that could disappear and no one would notice their absence. Women’s Affairs cost $4.7-million this year, and $14.5-million went on youth affairs. This is still small change considering the scale of Key’s spending problems.

A total of $502-million has been budgeted for climate change expenses in the 2009-2010 year, the bulk of which was $471-million for the allocation of NZ emission units to the NZ economy. This is a waste of money considering the hypothesis of anthropogenic climate change is in disarray. The leak of emails from the University of East Anglia last year, known as “climategate”, showed the extent to which scientists were manipulating data, thus destablising the basis for climate change spending.

English ordered a highly publicised line-by-line review of government expenditure. Most departments emerged from that review apparently unscathed, showing the Key government’s inability to rein in spending.

The big-spending departments are Social Development (aka welfare), which consumed $18.2-billion this year, Health $12-billion, Education $11.2-billion, ACC $1.2-billion, and Housing, around $1-billion.

Key ruled out other property taxes discussed by the Tax Working Group, including a capital gains tax, a land tax, and a risk-free return approach, thus incurring the wrath of a few commentators who hate landlords.

His possible move on depreciation would be sustainable, if unpopular, for landlords who produce a profit, but a disaster for those who are negatively geared. They would either have to further fund the shortfall out of their wages, or sell.

A possible move on depreciation raises another curious question. If depreciation is no longer claimable, would the recovered depreciation on the sale of properties subject to years of depreciation claims be similarly dropped?

Key may not have realized that he had grasped the biggest nettle in the field when he proposed increasing GST. He should heed the call for spending restraint to accompany tax changes, if any.